Debate

“There is a lot of money
in these projects”

Democracy put to the test

The dawn of genuine
development policy


05/2006		  

[ Interview with Katherine Sierra, World Bank ]

“There is a lot of money in these projects”

The World Bank is putting increasing emphasis on infrastructure. By the year 2010, its funding for such projects is expected to rise to an annual $ 10 billion (or 40 % of World Bank exposure), compared with a low of five billion in 2001. Katherine Sierra, vice president for infrastructure at the World Bank, elaborates on the issue.


In what sense is the new attention the World Bank is paying to infrastructure issues different from that of past decades?
Most of our programmes now focus on the access agenda. We want to support measures and policies that connect poor people – be it in urban slums or rural villages – to essential services such as water or electric power. Access to transport infrastructure is also very important. Earlier, the idea was more to set up infrastructures in the first place, with too little concern for whom they were going to serve. Providing access to marginalised people, areas or neighbourhoods is now the essential thrust of our portfolio. Perhaps that doesn’t get much public play, but it is – and will continue to be – very important. It’s critical for reaching the Millennium Development Goals of poverty reduction. Another aspect is that we want to enhance the overall investment climate. Infrastructures are essential for generating growth, jobs and employment.

Would you risk environmental degradation in the pursuit of economic growth?
We certainly know that in the early days of infrastructure promotion, let’s say some twenty years ago, environmental challenges were not considered core issues of development. Back then, the environment was seen as something you deal with once a country has reached prosperity. Before that stage was reached, one wouldn’t start mitigating environmental problems. But there was a lot of criticism and we have learned. We understand that one must, from the very outset, incorporate social sustainability and environmental sustainability into all project concepts. It is essential to look at the alternatives and to involve affected communities. We need to think about who are the beneficiaries and how other people might also benefit from a project. Attention must also be paid to issues of compensating for possible harm or resettling displaced populations.

What does that mean in tangible terms, for instance for the
dam project in Laos?
That is really the only big dam project we’ve been doing lately. We assessed the situation and found that we were dealing with a sensitive environmental issue, including flooding and the need for nature conservation. So what we did was ensure that land in Laos was set aside for a National Park and efforts made to protect it. In that sense, we linked our support for the dam with demands for nature conservation. All in all, the value that we brought to that project wasn’t so much in the financing, most of the funds came from the private sector. We contributed on the social and environmental side.

It seems that developmentally important projects cannot
always rely on private-sector investments. A decade or so
back, there was much excitement about unleashing market forces in infrastructure matters. That euphoria has pretty
much dissipated.
I think it is important to say which assumptions were correct and which ones were incorrect. The expectation was obviously overstated that there was going to be a large private-sector appetite for investment in all subsectors of infrastructure. If you look at what really happened you will find that most investments of international and local players were in telecommunications. The benefits in that field were tremendous, breaking up monopolies, lowering prices and introducing mobile telephony to poor countries. In this field, private-sector engagement has been a triumphant success almost everywhere in the world.

But telecommunications is not the only important field
of infrastructure.
No, it is not. And in other fields, the results have been mixed. Consider energy, for instance. There has been very important private investment. In many cases in East Asia, power plants and grids are working well. Here, provision of capital has helped to make market forces more proficient and to grant access to more people. However, there have also been worries. Structures were sometimes not as transparent as they should have been. Governments in search of popular support might grant subsidies or be reluctant to enforce the fees charged by private companies. If we talk to international investors today, they are pay-shy and do not want to get involved in energy infrastructure.

Doesn’t that prove that governance is what matters most? Private-sector utilities only do a good job when under strict governmental regulation. On the other hand, they can’t collect their money, if the authorities don’t play their roles.
No doubt, the public sector has a role to play in regulation. Wherever governance remains bad, the investment climate stays poor as well and private-sector utilities will not thrive.

What about private-sector involvement in water provision?
It is quite interesting that there is actually very little investment from the private sector into water subsectors. A rough estimate is that 90 % of the water investments made in the past ten years were funded by the public sector. We’re mostly dealing with public utilities. This is where I think there was a serious misreading of the market. Investor appetite was over-estimated, and the reluctance of the people, of local authorities and national governments to privatise this sector was under-rated. There are some well-functioning utilities with private-sector investment. They have been able to expand access, to lower costs and to fulfil the duties defined in their contracts. On the other hand, there were also cases of poorly structured contracts, promises of access that never materialised. Again, however, we are really talking about issues of governance rather than about the pros and cons of private-sector investment.

Please give some examples.
Well, we all know that there is a negative example going on right now in Bolivia. I don’t want to comment on the right or wrong of any party involved. Discussions are under way, but I certainly think it is fair to say that there is not much public support for private-sector water utilities in Bolivia. On the other hand, there have been good experiences in Columbia. The Colombian government allows for a lot of decision-making at the local level. It is municipal bodies that choose whatever solution they want, be it public, private or a public-private partnership. The Colombian approach is very pragmatic and there are various options for local solutions, provided they are run on a commercial, cost-covering base. The results are convincing, with or without private involvement.

As the World Bank does not do sub-national lending, you do
not have much influence on the decisions made by municipal bodies.
Well, to some extent we do. Our funds are channelled through the national government. But in many cases, loans are structured in a way for us to really be dealing with local governments. So it is fair to say that we work at the local level. And we would like to do sub-national lending. It would make sense to give the Bank more scope in that direction. Initial experiences of the IFC, the World Bank affiliate that finances private investments, have been promising.

Are you in favour of private-public partnerships?
Well, this tool could be used more. An important feature is trying to develop local capital markets. In order for authorities to raise money by issuing bonds, they need to be credible and reliable. I think in the long term, cities and states will need access to such sources of finance locally. For that to happen, institutions must improve – both in the private and in the public sector.

You were appointed while James Wolfensohn was president of the World Bank. What does his successor Paul Wolfowitz say about your approach?
He has been very supportive from the beginning and is in favour of what we are trying to do. President Wolfowitz asked us to make sure we have learned all of the lessons of past experiences. And he wants us to check that money isn’t lost because of corruption and misuse of funds. Of course, infrastructure isn’t the only area with such risks. But because there is a lot of money in these projects, they are vulnerable. I share the concerns expressed by President Wolfowitz. I really don’t want to be overseeing an increase in infrastructure spending without knowing that things will work out better than they did in earlier decades. I think we are all in a learning mode right now. It is not enough to rely on good practices, important as they may be. But we need to be creative and think of new ways to boost essential infrastructures.

Questions by Hans Dembowski and Roland Bunzenthal.


Katherine Sierra
is vice president for infrastructure at the World Bank. She was in Germany at the end of March to discuss joint action with German Technical Cooperation (GTZ) and KfW development bank.
ksierra@worldbank.org